If NRI's sell their property located in India after retaining it at least for two years, they are liable to pay Long-term Capital Tax at the rate ranging between 20.80 to 28.50%. However, this tax rate can be lowered or cut down with the help of lower TDS deduction certificate available under the Income Tax Act, 1961.

There is a fair amount of confusion about tax imposition for Non-Residents Indians who want to sell any property that they may have in India. NRI’s who are selling house property situated in India have to pay capital gain tax. The tax that is payable on the profit depends on whether it is a short term or long-term capital gain.

What is a capital gain on property sold by NRI's?

The property held by an NRI seller is categorised as a "Capital Asset", which can be a long-term capital asset or a short-term capital asset. When a property is sold after a period of two years from the date it was owned - it attracts long-term capital gain tax. In case it is held for less than two years or less, it attracts short-term capital gain tax.

Long term capital gains shall be implied with a concessional rate of 20% (excluding surcharge and cess) on the sale value whereas the short-term capital gains shall be implied at the regular tax slab rate which is 30% on the sale value.

Capital gains for NRI's selling property

Capital gains = Sale Consideration - Cost of Acquisition. (purchase cost to NRI). If Non-Resident Indians sell their property located in India after retaining it at least for two years, then they have to pay a long-term capital gain tax ranging between 20.80 to 28.50% depending on the transaction value of the property, under Section 195 of the Income Tax Act, 1961. However, NRI's can lower down this TDS deduction with the help of exemptions and deductions available under the same Act. According to Section 197, every buyer who purchases property from NRI seller, needs to deduct a TDS at the rate of 28.50% on gross sales proceeds. In such a situation, first paying TDS at the rate of 28.50% and then claiming the refund after filing an income tax return, which may take months, would be a tedious task.

Instead, NRI sellers can avail a lower or No TDS Deduction Certificate from the Income Tax Department in case their actual tax rate is lower than 28.50%. This will help NRI's to save themselves from the hassle as well as avoid locking their money through TDS Deductions at the rate of 28.50% of the sales proceeds for year's.

It is advisable to apply for low or no TDS Deduction Certificate under Section 197 of the Income Tax Act, 1961 as soon as one finds a prospective buyer and the sale value of the property is fixed.

The Income Tax Department may ask for the following documents to issue a Nil or Lower Tax Deduction Certificate.

  • Passport
  • PAN
  • Sale Agreement / Sale Deed
  • Proofs of cost of acquisition
  • Indexed cost of acquisition
  • Income Tax Returns
  • TAN of buyer
  • Bank account statement
  • Proof of advance received
  • Any other document deemed relevant

An NRI seller can also apply for a lower tax deduction. This can be done by deducting TDS only on capital gains. As per Section 195 of the Income Tax Act, the TDS will be calculated only on capital gains, instead of calculating on the total sale value. This can help NRI's to arrive at 1% or 2% TDS, and in some cases, even No TDS is required if there is no actual gain reflected in calculations. Moreover, NRI's can also save on TDS by reinvesting capital gain amount in another property in India within two years from the sale.

They can also invest the amount in tax-free bonds within a span of six months from the date of sale.

NRI's can save on TDS by making wise moves at the time of property sale and even after receiving the proceeds. It is important to stay informed and check income tax regulations related to long term and short-term capital gain tax before making such sale.